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United Therapeutics Could Lose The Battle For PAH Therapies

NEW YORK (
TheStreet) -- I see big risks ahead for
United Therapeutics(UTHR - Get Report). An FDA drug approval decision expected at the end of the week could easily go against the company and competitors, including generic competition, are getting stronger.

Before I explain the bear case against United Therapeutics in more detail, let's talk briefly about the other side of the argument. Bulls contend that a $2.3 billion enterprise value is too low for a company with three marketed drugs to treat pulmonary arterial hypertension (PAH) -- Remodulin, Tyvaso and Adcirca -- that generate nearly $900 million in combined revenue.

Bulls also expect FDA to approve an oral formulation of Remodulin (known chemically as treprostinil) on Oct. 26. United Therapeutics will use its existing sales force to sell oral treprostinil, providing the company with big P&L leverage. Earnings growth will accelerate as a result and the company's price-to-earnings multiple (currently modest) will expand.

I understand the bull story on United Therapeutics (which has the stock trading near its 52-week high) but I'm not convinced. What I see instead for the company is a significant near-term regulatory risk for oral treprostinil and long-term challenges for the existing PAH franchise.

Let's dig into the details, starting with the generic threat to the company's core PAH drugs.

Pulmonary arterial hypertension (PAH) is a rare, progressive disease characterized by high blood pressure in the arteries that funnel blood from the heart to the lungs. As these pulmonary arteries narrow over time, the heart is forced work harder and blood pressure in the lungs reaches dangerous levels. As PAH worsens, patients develop heart failure and die.

In mid-2002, United Therapeutics received FDA approval for Remodulin, a synthetic analog of the vasodilator prostacyclin, administered via intravenous infusion. A subcutaneous injectable version of the drug was approved later.

Remodulin generates annual sales of $450 million for United Therapeutics despite lackluster clinical efficacy -- a 10-meter improvement in six-minute walk test (6MWT) that failed to reach statistical significance in a pivotal trial. (Make sure to remember this 10-meter walk improvement, I'll come back to it later.)

United Therapeutics' other two drugs are used to treat earlier-stage PAH patients. Tyvaso is an inhaled formulation of treprostinil generating annual sales of roughly $320 milllion. Adcirca is a phosphodiesterase type-5 (PDE-5) inhibitor that contains the same chemical entity as Eli Lilly's Cialis (the PAH dose is much higher than that used for erectile dysfunction). Adcirca sales have reached $120 million on an annualized basis.

Earlier this year, Sandoz --
Novartis'(NVS - Get Report) generics business unit -- filed a Paragraph IV-containing Abbreviated New Drug Application (ANDA) for a generic formulation of Remodulin. Sandoz believes its generic version of Remodulin either does not infringe the patents owned by United Therapeutics or that those patents are invalid. United Therapeutics sued Sandoz in response, triggering the 30-month waiting period for FDA approval mandated by Hatch-Waxman regulations.

United Therapeutics claims it has a "method of use" patent that protects the treprostinil franchise until 2029, but this type of patent is often inadequate to prevent generic entry. Nonetheless, the Hatch-Waxman waiting period buys the company a little time. Absent an earlier court ruling in Sandoz' favor, which won't happen, the earliest a generic Remodulin could reach the market is the second half of 2014. Usually, the two sides settle litigation and agree to a slightly deferred generic launch date -- 2016 seems reasonable in this case -- rather than wage a costly court case.

United Therapeutics also contends physicians will be hesitant to use generic Remodulin due to the inherent fragility of PAH patients. Even if branded sales are stickier than usual, which is possible but far from certain, I would expect a generic competitor to erode branded Remodulin sales by at least 40%.